Spain: more consolidation likely as mobile market contracts 13%

Friday 2 May 2014 | 11:20 CET | Background

The Spanish market is showing the first signs of consolidation, following the acquisition of cable operator Ono by Vodafone for EUR 7.2 billion. This is one of the inevitable consequences of a tough telecom market such as Spain, as smaller operators join forces in order to compete. Even though converged service bundles are providing some growth, Spanish mobile service revenues fell 13.0 percent in 2013. Also in terms of customers the mobile market contracted by 4.1 percent to a total 51.0 million, mainly due to the decline in prepaid and a large drop in postpaid clients at market leaders Movistar and Vodafone. Below we provide a short analysis of the most important developments on the Spanish mobile market, based on Telecompaper's latest figures.

Service revenue decline worsens, as economy, regulation and competition bite

The Spanish mobile market deteriorated further in 2013 and showed an annual drop of 13.0 percent in full-year service revenue to EUR 11.7 billion. This followed an annual drop of 11.2 percent in 2012. The decline in service revenues can be attributed to a number of trends, the most important of which is the economic situation. Although Spain seems to be out of recession, it has fallen into deflation, making it very difficult for operators to maintain prices even at current levels. According to a recent study from the Spanish regulator CNMC, the amount spent by Spanish households on telecommunications services fell by 9 percent in the third quarter of 2013 compared to a year earlier. The main reason for the decline was competition among operators and the increasing popularity among consumers of money-saving convergent offers. Competition in the Spanish market has centred on the promotion of bundles of both fixed and mobile services, offered by the leading mobile operators as well as alternative fixed operators. The latest quarterly reports from operators show again that they are all gaining customers for the quad-play offers. However, the winners in the mobile segment seem to be mainly the smaller fixed-line operators, Jazztel and Ono.

Other important trends impacting revenues in the Spanish market include:

The shift to SIM-only offers and decline in subsidized tariff models

Regulation of MTA fees, with the last reduction cutting the rate by 75 percent to EUR 0.019 per minute from 1 July 2013.

In terms of mobile customers, the Spanish market lost 2.2 million connections (-4.1 percent) in 2013 for a total 51.0 million at year-end. The rate of decline slowed somewhat towards year-end (see graph). In the fourth quarter of 2013, the loss was 0.6 million customers (-1.3%), as the drop in prepaid customers continued to exceed the smaller increase in postpaid customers (which only occurred at Orange and Yoigo). It should be noted that subscribers of MVNOs using the Movistar (such as Lycamobile and Ono) and Vodafone (such as Lebara and R Cable) networks are excluded from the reported numbers. Orange does include MVNOs and M2M connections in its numbers (as does Movistar with M2M), making a fair comparison somewhat difficult.

Of the 2.2 million mobile lines lost in the past 12 months, more than 2.3 million were prepaid, while postpaid only dropped 0.1 million. As a result, the share of postpaid in the total base increased to 72.2 percent at the end of 2013, versus 69.0 percent a year earlier. Orange and Yoigo were the only ones to add postpaid customers in both periods. Movistar and Vodafone lost the most in prepaid and also showed a net loss in postpaid, both annually and quarterly. The drop in customer numbers was mainly due to disconnections of inactive customers (mainly prepaid) but also to MVNOs gaining customers.
According to the Spanish regulator, the total MVNO market (with around 20+ players) reached 6.5 million subscribers at the end of 2013, up by 1.8 million or 36.9 percent annually. The regulator does not report individual MVNO shares, but of the MVNOs that do report financial figures, we believe that cable operators Ono and Jazztel showed the strongest growth in mobile.

One of the inevitable consequences in a tough telecom market such as Spain is the need for smaller operators to join forces in order to compete, particularly with the market showing signs of further contraction. Ono’s recent acquisition by Vodafone in March seems to be setting the stage for more M&A activity.

According to Vodafone’s CEO Vittorio Colao, “The Spanish telecommunications market only has room for three or four major operators, which should be allowed to compete on a level playing field. I don’t think it makes sense to have a market with eight or nine players.” The three major operators would be Telefonica, Vodafone and Orange, and a “competitive oligopoly” would be the ideal scenario, he said. However, Colao went on to criticise the “fortress” that is Telefonica in Spain and stressed that competition between the three operators would be “difficult” if the incumbent continued to close its doors to any sort of cooperation.

Regarding possible takeovers, Ono CEO Rosalia Portela seems to believe next in line are the regional cable operators, such as R in Galicias, Telecable in Austurias and Euskaltel in the Basque Country. “These companies need volume,” said Portela in an interview with Spanish daily ABC. “And the most reasonable way forward for them is to gain it with us. But this is like a wedding, both parties need to want it,” she added. Ono’s CEO also commented that Spain cannot afford to have four different fibre networks, and that Telefonica and Vodafone are the only two operators with a genuine capacity to invest, because Orange Spain’s possibilities depend on the priorities of its French parent company.

Orange’s Spanish unit is currently the third largest operator in the country and it seems to be stepping up its search for a takeover target as it seeks to avoid falling behind its rivals. Orange is currently in talks with investment banks about possible bids for operators such as Jazztel and Yoigo, the Spanish unit of TeliaSonera, but may opt in the end against an acquisition if the prices are too high, reported Bloomberg citing unnamed sources close to the company.

Further consolidation is also expected in the MVNO market, such as the recent announcement that Spanish telecommunications provider Ibercom reached a preliminary agreement to acquire 100 percent of MVNO MasMovil.

The above figures are based on Telecompaper’s database on the Spanish mobile market, which are available for purchase. For more information, click here.

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